Homeowners Association

We specialize in tax and accounting engagements for California homeowners associations. We can work with your management company or directly with the board of directors in meeting the unique reporting and tax deadlines of this industry.

Form 3500 Exempt Status
We prepare the Franchise Tax Board form 3500 which requests exempt status for homeowners associations.

Education
We have prepared a power point presentation which can be presented to the board of directors or to the property management company which explains various documents, tax law, and the audited or reviewed financial statement. This presentation is offered at no cost.

We specialize in the preparation of:

• annual tax returns
• reviews and audits
• obtaining state exempt status

We have been performing these types of services for over thirty-five years. Our firm currently serves over one hundred fifty homeowners associations.

Reviews and Audits of Homeowners Associations

Requirements of the Davis-Stirling Act
The Davis-Stirling Act requires the following: "A review of the financial statement of the association shall be prepared in accordance with generally accepted accounting principles by a licensee of the California Board of Accountancy for any fiscal year in which the gross income to the association exceeds seventy-five thousand dollars ($75,000). A copy of the review of the financial statement shall be distributed within 120 days after the close of each fiscal year."  A review of the association's books and records can only be done by a Certified Public Accountant.

What is a review?
The completion of a review engagement by a CPA is prescribed by a set of procedures called "Statements on Standards for Review and Accounting Services." Some of the requirements of these standards are:

• Performing analytical procedures such as comparing current year financial information to prior year financial information and to budgets.
• Making inquiries of management regarding such items as litigation and collectability of assessments.
• Inspecting supporting documentation such as bank statements, disbursement invoices, and board of director’s minutes, etc.

A higher level of financial statement engagement is an audit. Audit procedures are regulated by a set of standards called Generally Accepted Auditing Standards. The reasons for having an audit done instead of a review are:

• The association's CC&R's require an audit.
• Fraud or embezzlement is suspected.
• A change in management companies has occurred and the board is not confident in the previous management company's accounting.

What is an audit?
One of the major differences between an audit and a review is the study of internal control and the consideration of risk factors specific to the association. An audit requires studying and documenting the processes, policies, procedures, and management attitudes which the association has adopted to ensure the safe keeping of association assets and the accurate and complete reporting of transactions.

Management Responsibility for the Complete and Accurate Preparation of Association Financial Statements

In 2002, legislation called Sarbanes-Oxley was passed by Congress in response to the melt-down of Enron. One provision of the act requires management to take responsibility for their financial statements. This includes the board of directors of homeowners associations. The provision is as follows:

"Summary of Section 302 Periodic statutory financial reports are to include certifications that:

• The signing officers have reviewed the report
• The report does not contain any material untrue statements or material omission or be considered misleading
• The financial statements and related information fairly present the financial condition and the results in all material respects
• The signing officers are responsible for internal controls and have evaluated these internal controls within the previous ninety days and have reported on their findings
• A list of all deficiencies in the internal controls and information on any fraud that involves employees who are involved with internal activities
• Any significant changes in internal controls or related factors that could have a negative impact on the internal controls"

You will find much of the above language in the engagement letter you will sign with the Certified Public Accountant. What this means is that the board of directors is stating that they have reviewed the financial statements, have evaluated the internal controls of the association, and are taking responsibility for their completion and accuracy.

Documents You Will Be Asked to Sign

Review

• Engagement letter. This is the contract between the association and the CPA.
• Management Representation Letter. This is a letter from the association to the CPA which makes certain statements related to the information provided and also makes certain statements regarding the assumption of other responsibilities of the association.

Audit
In addition to the above, you will be asked to sign:

• Bank confirmations and legal confirmations.
• Treasurer questionnaire. This is sent to the treasurer asking questions regarding processes and internal controls of the association.
• Predecessor Auditor Request Form. If this is the first year that the CPA will be doing the audit, the CPA is required to contact the previous auditor.

Davis-Stirling Act

The Davis-Stirling Act was passed in 1986.

The legislation applies to all common interest developments in the State of California. This body of law provides many rules and regulations which a homeowners association is required to follow. Like most legislation, it is lengthy, complicated, and changes. It is incumbent on the board of directors to either gain expertise with the legislation or to hire a management company which can provide the expertise needed to comply.

One of the provisions of the law is that if the gross receipts of an association exceed $75,000, then the association is required to have either a review or an audit prepared by a Certified Public Accountant. The association's governing documents will specify if a review or an audit is required.

The Davis-Stirling Act requires the following:

“A review of the financial statement of the association shall be prepared in accordance with generally accepted accounting principles by a licensee of the California Board of Accountancy for any fiscal year in which the gross income to the association exceeds seventy-five thousand dollars ($75,000). A copy of the review of the financial statement shall be distributed within 120 days after the close of each fiscal year."  A review of the association's books and records can only be done by a Certified Public Accountant.

Forensic and Reconstruction Audits

On occasion a homeowners association will require a forensic or reconstruction audit. A forensic audit may be called for if the association suspects fraud or embezzlement. The main emphasis in a forensic audit would be to apply audit procedures to detect the misappropriation of assets.

A reconstruction audit is called for when the association does not necessarily suspect fraud but a complete set of accounting records does not exist. This involves entering transactions and reconciling accounts so as to produce financial statements and a general ledger. Both types of engagements are very time consuming. The task becomes more complicated if adequate records are not readily available and documents need to be ordered from financial institutions and other parties.

We have experience in performing these types of engagements.

History of Homeowners Associations

Homeowners associations started in the mid 19th century in the United States. During this period of time, the United States was transforming from an agricultural society into an industrial society. People were working in cities, which were dirty, crowded, and noisy. At the same time commuter rail lines were becoming available. “Railroad communities” grew up beside the railroad stations.

The number of associations was limited until the 1960’s. The federal government was a major player in the expansion of HOA’s. The Federal Housing Authority and the Urban Land Institute pushed for large residential developments. There was an increasing preference for architectural uniformity, available land was decreasing, construction costs were increasing and federal mortgage insurance rules were modified to include homeowners associations.

Early in the 20th century, the governing documents of some associations included terminology which excluded certain racial groups. One covenant in a Seattle, Washington association stated, “No part of said property hereby conveyed shall ever be used or occupied by any Hebrew or by any person of the Ethiopian, Malay, or any Asiatic race.” Court rulings later banned such covenants.

In the 1970’s developers began promoting high density residential living. To sell their projects they included green open areas within the association grounds and provided services that formerly had been provided by the municipalities. Residents would still pay taxes on these common green areas, however. Local governments climbed on the band wagon with the developers because this increased the government’s cash flow. The Davis-Stirling Act was enacted in 1985. This body of law governs the operation of all types of associations. This statute was passed partly in response to the collapse of the largest management company in Southern California in 1984; Westminster based Community Association Management Specialists. Thousands of dollars of multiple association funds were embezzled.

It is estimated that six million Californians live in some type of homeowners association. This is about twenty percent of the state’s population.